Code behind the Simple Deform Modifier
After further research.

The Simple Deform modifier modes are in fact basic operations of rotating (Twist &amp; Bend) and scaling (Taper &amp; Stretch). The code for the Taper function is given above.

The calculation of the deformation is performed in the local coordinate system. The parameters r_co[0] … [3] are thus the local X, Y en Z coordinates of the object. Depending on the location of the origin of the object, these can be positive, negative or both. In the figure below, the origin is at the bottom of the object, so all local Z coordinates are positive.

Originally, the parameter Factor comes from the user (0.750 in the example) but is adjusted somewhere else in the code for the size of the object in the Deform axis. It is also influenced by the parameter Limits. In the example, the deform axis is Z and the object has a size of 3 units in this axis. So, the factor used in the function is 0.750/3 = 0.250; e.g. the total amount of deformation is spread over the entire deform axis.

So, all vertices are scaled in the local X and Y axis. The local Z-coordinate remains unchanged.
Following the given formula the deformed vertex is calculated as follows:

Vertex (-0.5,0,3);  -0.5 + (-0.5*(3*0.250)) =  -0.875
Vertex (-0.5,0,2);  -0.5 + (-0.5*(2*0.250)) =  -0.750
Vertex (-0.5,0,1);  -0.5 + (-0.5*(1*0.250)) =  -0.625